No innovation here: Parts for phone cost $174.15, with 200% markup

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iSuppli Corporation did a teardown of Google's Nexus One phone -- breaking it down into parts, and pricing each part -- and determined that the phone cost $174.15 to build.

Updated at 10:48 AM PDT on Monday, Jan 11, 2010

We love our smartphones. They're fast and fun and make our lives easier, so we don't bat an eye at spending hundreds of dollars (either through up-front costs, or costly fees during two-year contracts) for iPhones, Nexus Ones and Droids.

But why are smartphones so expensive? Actually, they're not. According to iSuppli, a company that tears apart phones to figure out the price of the parts, the top-of-the-line smartphones all cost under $180 in parts. Cell phone makers and carriers just tack on huge markups. Google, the company that has given us lots of free services over the years, had a chance to break that cycle with its new phone, the Nexus One. Instead of innovating the smartphone price structure, Google went for the money grab.

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The combined parts of the Nexus One phone -- the newest smartphone on the market, with a super-fast snapdragon processor -- cost $174.15, according to iSuppli. Yet Google charges $530 for the phone (which is actually made by HTC, runs on Google's Android operating system and is sold by Google) without a contract.

With a two-year contract with T-Mobile, it's $180, but T-Mobile tacks on an extra $20 per month for the life of the two-year contract, bringing the total price ($180 + $20 * 24months) to $660.

To be sure, as Business Insider points out, there's more to building a phone than material costs -- there's development investments that must be recouped, labor costs for manufacturing, marketing, etc. Still, a 200% mark-up is steep. And it's not unique to the Nexus One.

iSuppli's tear-down of an iPhone 3GS revealed that Apple's newest smartphone costs $178.96 in parts (that's the 16G version ). Apple charges $199 for the phone ($299 for the 32G version), which can only be bought with a two-year contract -- which includes a $30 monthly iPhone data fee.

Maybe we shouldn't have hoped for anything better from Google. But when word leaked that the Mountain View company was developing its own phone, some people looked at the company's track-record and hoped it would end the cycle of steep smart-phone markups.

After all, this is the company that gave us Gmail (free unlimited e-mail mailboxes), Google Docs (free substitute for Microsoft Office), Google Voice (free telephony services), GOOG-411 (free directory assistance) and more. Surely giving useful services that makes lives better for an affordable price -- that also just happen to deliver Google ads -- is a priority to the company. That ethos would translate to a cheap smartphone, right?

But Google realized something. We'll pay. For three years, consumers have shelled out hundreds of dollars for iPhones. They'd do the same for a Google phone. And maybe, since the phone's actually built by HTC, Google didn't even have that much of a say in the pricing.